GRAT Expectations

The grantor retained annuity trust (GRAT) is an irrevocable lifetime trust that allows a donor to pass appreciation from assets to heirs free of estate taxes. The appreciation is only subject to a tax-rate set monthly by the IRS. This tool is especially attractive now with stock values, housing values, and IRS rates all relatively low. Homeowners and Wall Street investors should be giving serious thought to establishing GRATs in this fiscal environment.

For all its splendor, the GRAT is a very simple concept. Donors place certain appreciable assets into trust naming children as beneficiaries. Over the term of the trust, regular payments are made back to the donor. These payments are structured so when the trust expires the donor will have received the original value of the assets deposited plus the value of taxes paid. Any appreciation earned then transfers to the beneficiaries at the closing of the trust tax-free.

For a GRAT to properly pass assets tax-free, the trust instrument must create a valid, irrevocable trust with a set number of years. The term of the trust must expire while the donor is still living. If you create a GRAT and die before the term expires, the assets simply fall back into your taxable estate.

The GRAT is a powerful tool for people with large stock holdings, property holdings, or anticipating a large increase in business holding value (i.e. IPO, closed sale of business, etc.), especially in the current economic climate. If you have questions as to whether a GRAT could benefit you and your family, contact an attorney today.